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jf-UPDATE 4-Mexico plan to beef up tax revenues nears final Senate approval

Michael O'Boyle and Dave Graham
Wednesday, 30 Oct 2013 | 8:43 PM ET

MEXICO CITY, Oct 30 (Reuters) - Mexico's Senate on Wednesday was close to passing a package of measures to bolster the country's weak tax revenues, including higher taxes for the rich, levies on sugary drinks and junk food, as well as a charge on stock market gains.

After giving general approval to the fiscal bill late on Tuesday, the Senate must still vote on divisive sections lawmakers want to repeal or amend, a process which has been held up by sparring by the biggest opposition party.

The fiscal reform is one the main planks of President Enrique Pena Nieto's economic agenda, and although it will not raise as much new revenue as had originally been hoped, it has prompted vigorous attacks from opponents and lobbyists.

Disputes over the bill, which aims to introduce a new top income tax rate of 35 percent, risk complicating negotiations over other reforms sought by the ruling Institutional Revolutionary Party (PRI), which lacks a majority in Congress.

At the center of the president's reform ambitions is his proposal to open up the state-run oil industry to more private capital. On this front, the PRI is banking on assistance from the conservative National Action Party, or PAN.

But the PAN has been at loggerheads with the PRI over the fiscal reform, forcing the PRI to work with the leftist Party of the Democratic Revolution (PRD) to improve the tax take. The PRD, by contrast, is against Pena Nieto's energy reform.

The PAN walked away from the Senate debate on reservations to the fiscal bill early on Wednesday after accusing the PRI of not taking its concerns seriously.

The PAN was upset when it failed to stop the standard rate of value added-tax of 16 percent being extended to border states presently enjoying an 11 percent rate, and has said it will not return to debate the reservations.

PRI Senator David Penchyna said he expected voting on the reservations to be wrapped up late on Wednesday, without the chamber making any serious alterations to the tax bill.

From around 6 p.m., senators were expected to start debating remaining reservations to the bill.

Without PAN votes, there is little prospect of major changes to a bill that envisages increasing Mexico's total tax take by about 2.7 percent of economic output by 2018.

OIL REFORM

The PRI wants to avoid significant changes to the tax bill because amendments made in the Senate would mean sending it back to the lower house of Congress. The reform is due to be approved by the end of this month.

Once the fiscal reform is passed, Congress will set about approving Pena Nieto's energy overhaul, which aims to lure private capital with profit-sharing contracts.

But the PAN feels Pena Nieto's model does not go far enough to attract major investment and lawmakers in the party have pledged to pressure the PRI into providing greater incentives to oil companies, such as production sharing contracts.

That could put the president under attack from leftists who accuse the government of wanting to sell out Mexico's oil wealth to foreigners and could mobilize large protests.

The PAN may also push the PRI for a more radical electoral reform aimed at weakening the PRI's hold on power in Mexico.

The tax overhaul is a part of a series of reforms that Pena Nieto hopes will strengthen the economy and help boost a growth rate that has lagged that of other major emerging markets.

Earlier this month, the lower house watered down the tax bill, throwing out some measures including plans to apply sales tax to rents, mortgages, property transactions and school fees.

At the same time, the PRI, supported by the PRD, modified the fiscal reform to lift top income tax rates, pushing more of the burden onto the richest section of society.

Roughly half of Mexico lives in poverty, while much of its wealth is concentrated in the hands of a few powerful families like that of billionaire telecoms mogul Carlos Slim.

The top rate of income tax in Latin America's no. 2 economy is currently 30 percent, but the reform sets out a sliding scale of higher rates capped at 35 percent for those earning more than 3 million pesos ($233,000) a year.

Senate lawmakers are still considering a proposal to raise a planned levy on junk food from 5 percent to 8 percent.

Changes to the tax bill in the lower house in mid-October created a shortfall in the budget plan for next year.

That prompted lawmakers to raise the government's oil revenue estimate and make other changes to close the gap. These are due to be voted by the Senate by Oct. 31. The tax bill is tied to the budget, which must be approved by mid-November.